Friday, November 16, 2012

Council pensions, mergers and the infrastructure cacophony

(this is an article I wrote for Professional Pensions which was published yesterday on behalf of the AMNT. An earlier John's Labour Blog version is here).

"Recently Sir Merrick Cockell, Chair of the Local Government
Association announced that he personally supported the merger of the 101
different Local Government Pension Schemes (LGPS) into 5 “super schemes” each
worth around £30 billion each.

He was being interviewed about a report from The Future
Homes Commission on the need for investment in residential property. He argued
that to invest in such infrastructure you need massive scale. There are claims
that this merger and investment could result in 300,000 more homes being built
every year with 15% of pension assets being invested

His comments are likely to be more than a little
controversial in the sedate world of Council pension funds. Merger is controversial. Some funds have
consistently argued for merger in the past not only to enable infrastructure
investment but to increase returns and slash costs. Others say "rubbish",
bigger doesn't mean better and small is often beautiful (and more democratic and
responsive). The fragmentation of
pension funds in the private sector is also far worse.

Yet, the governance concern about these proposals is even
more significant than a spat over size.

As a LGPS member nominated representative I have been in
favour of looking into the merits of merging Council pensions schemes for many
years. Also investing in rented residential properties as an asset class with the
prospect of long term inflation linked returns has always seemed attractive.

But remember pension funds must be run in the interests of
the scheme beneficiaries and not make up for an inadequate state housing policy
or the need to stimulate demand in the wider economy.

Have Councils in favour or opposed to merger actually
consulted beforehand on this issue with their beneficiaries? Why is the
government being let off the hock and not asked for guarantees?

The local government trade unions have quite rightly objected
to this plan which was made without any consultation with them. There is a planned cap on employer
contributions to the LGPS so if this infrastructure investment goes belly up
then active beneficiaries will be left to pick up the pieces.

15% is a very significant amount of assets to invest in any
one class. Nothing in life is risk free. There is an obvious risk of property
price crashes or even that future housing benefit cuts could derail plans. Hundreds of organisations are cited as
contributing to the Future Homes report but there is no input from those whose
money it is being proposed should be put at risk?

For this still worthy proposal to have any legs there needs
to be firstly proper consultation with the representatives of scheme beneficiaries
on why this is good for them and then the drawing up of a business plan as water
tight as possible".

Update: The Government are now consulting on plans to allow Council Pensions to invest up to 30% of its assets in infrastructure? Up from the existing limit of 15%. Hello, 30%! What is going on here?